Feuds on TV Contracts Escalate Between Broadcast and Cable

The CBS headquarters seen on Aug. 2, 2013, in New York City. Time Warner Cable briefly dropped CBS in three major markets -- New York, Los Angeles and Dallas -- after negotiations fell through.

A recent spat between CBS and Time Warner Cable, which resulted in CBS being briefly dropped in three major markets, showed that cable providers are losing some leverage as viewers go online.

The stakes are getting higher on retransmission contract fights between broadcast networks and cable providers, as a recent exodus of subscribers from Time Warner Cable shows viewers have plenty of options to watch their favorite programs.

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Approximately 306,000 of the 11.7 million subscribers to Time Warner Cable left the paid TV service during its third quarter, largely because CBS programs became unavailable in some regions during a contract dispute with that network, the cable company announced on Thursday. The two companies reached an agreement on fees for the right to retransmit programming at the start of September, just in time for the start of fall programming and the NFL season. The third quarter earnings report from CBS on Wednesday will show what kind of a hit the network took during that blackout.

Broadcasters and cable companies will likely seek to avoid the same fallout from subscribers when negotiating future retransmission contracts, says John Hane, a media lawyer at Pillsbury Winthrop Shaw Pittman, a firm which specializes in business and technology law. Broadcasters may collect more than $ 6 billion in retransmission fees by 2018, estimates SNL Kagan market research firm.

“In the last 18 months the pay TV companies have been forcing a lot of blackouts as a tough negotiating strategy and in hopes of getting Congress to regulate retransmission consent rates,” Hane says.

Congress is considering changes to a law that governs satellite TV carriage by the end of 2014, but they may pass a reauthorization of the bill without any changes.

“The Time Warner Cable-CBS debacle reminded cable companies that when they get too aggressive in negotiations and take away local broadcast stations their subscribers have choices,” Hane says.

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Cable companies have started paying broadcasters in cash in recent years instead of deals on satellite carriage, and demands for payments have continued to escalate since then, says David Kaut, a telecom industry analyst at Stifel Nicholaus investment research firm.

“During these blackouts broadcasters suffer more in the short term since they lose viewers” Kaut says. “The minute an agreement is reached and programs go back on the air the broadcasters get dollars back. When a major content provider blacks out on cable, it’s more incremental day by day. The problem is that they have a harder time getting those people back since they have a subscription service. That’s why cable companies see some broadcast content as programming that they can’t go without.”

Subscribers have the option of going to online TV services, and cable companies are also looking to online TV for a potential edge against broadcasters, Kaut says. Cable companies are watching online TV service Aereo to determine whether they will also be able to retransmit a broadcast signal online without paying retransmission fees to networks, he says.

Networks including Fox, CBS, NBC and ABC, on Oct. 11 appealed to the Supreme Court to shut down Aereo. The online TV service has won legal challenges from networks since launching in 2012, and if it continues to win legal challenges cable companies might partner with the service or come up with their own retransmission systems, Kaut says.

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“It could be a way for paid TV to bypass the broadcasters or they could use that threat as leverage during renegotiation for retransmission contracts,” Kaut says.

Cable companies may threaten to use an Aereo-type service and counter the need to pay fees to broadcasters as part of contract renegotiations, but “most insiders think that’s just posturing,” Hane says.

“Even if it was legal, only a handful of the hundreds of pay TV companies could even do it without spending more money than they would save,” Hane says.

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